FASB, IASB Proposal Seeks to Clarify Reporting Entity Concept

FASB and the IASB Thursday published an exposure draft, Conceptual Framework for Financial Reporting: The Reporting Entity, that is part of a joint project between the boards to develop a common and improved conceptual framework for developing future accounting standards.

The ED discusses what constitutes a reporting entity, which in different situations could be a group of entities, a single entity or only a portion of an entity.

Under the proposal, a reporting entity is a circumscribed area of economic activities whose financial information has the potential to be useful to existing and potential equity investors, lenders, and other creditors who cannot directly obtain the information they need in making decisions about providing resources to the entity and in assessing whether the management and the governing board of that entity have made efficient and effective use of the resources provided.

An entity controls another entity when it has the power to direct the activities of that other entity to generate benefits for (or limit losses to) itself. If an entity that controls one or more entities prepares financial reports, it should present consolidated financial statements.

A portion of an entity could qualify as a reporting entity if the economic activities of that portion can be distinguished objectively from the rest of the entity and financial information about that portion of the entity has the potential to be useful in making decisions about providing resources to that portion of the entity.

For more information, click here. Comments are due by July 16, 2010.